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Suresh Krishnamurthy

STOCKS with market capitalisation of less than Rs 100 crore are generally more suitable for trading than for investment. Such stocks move up and down for reasons not known to the majority of the investing public. Surprisingly, however, these micro-caps have turned in a strong performance as a group.

In the six years between 1997 and 2002, micro-caps — stocks with market cap of less than Rs 100 crore — delivered average returns of 188 per cent — double that of the next best performing segment, small-caps. Micro-caps make up 80 per cent of the market in terms of numbers. However, they form only 5 per cent of the market by value.

The performance of micro-caps has fluctuated significantly. In four of the six years, micro-caps have underperformed small-cap stocks. The returns have fluctuated so much that their annual returns could be 100 per cent above or below their average.

They are truly stars that shine during a bull run in the market place. In the 1999 bull-run, 819 stocks recorded returns of 90 per cent or more. This was at a time when an average small-cap stock recorded returns of just above 48 per cent. In contrast, in the bear hug of 2000, 714 micro-cap stocks recorded losses of more than 40 per cent.

Interestingly, micro-caps failed to sizzle in 2002, when stock prices were generally looking up. This reinforces their reputation of being unpredictable. They have, however, come back in force in 2003 and investors may need to exercise caution.

Sizzling stars: Between 1997 and 2002, each year had its share of sizzling micro-cap stars. These have delivered returns ranging between 624 per cent and 34,312 per cent. The performance of micro-caps has been particularly sizzling after 1997.

In 1997, stocks such as Trigyn Technologies, Orient Information Technology and Satyam Computer that sizzled in the market, delivering returns of 380-624 per cent.

Since then, stocks such as Sree Meenakshi Mills, Netvista Information Technology, Sun Infoways, Dhanlaxmi Cotex and GG Automotive Gears have notched returns of more than 1,000 per cent a year.

The performance of stocks in the 1999 bull run is striking. The stock of Netvista Information Technology gained 34,300 per cent followed by Top Telemedia with a return of 15,175 per cent.

Stocks such as Odyssey Technologies, Aftek Infosys and Solid Containers gained more than 4,000 per cent. In all 55 stocks notched returns of more than 1,000 per cent.

Quick burnout: These stocks, however, burnt out rather quickly. Very few of them continue to grow, though there are exceptions that have emerged as long-term performers.

Stocks such as Satyam Computer, MphasiS BFL, Berger Paints, HCL Infosystems, JB Chemicals, Pantaloon Retail and TVS Electronics have grown from micro-caps to larger companies. However, for every such stock, hundreds have fallen by the wayside.

In particular, many IT start-ups that promised much with sizzling stock price returns are damp squibs nowhave fallen out of favour. These include Mascon Global, Orient Information Technology, MindTeck, R. S. Software, KLG Systel and Synergy Log-In Systems.

The message to investors is that if they patronise such stocks they need to be nimble-footed. You cannot get rich over the years in these stocks. You can only get rich quickly.

Given the sharp surge in prices of many such micro-cap stocks now, profit-booking may be advisable now.

It is also clear that micro-cap investing is no more than a gamble. At most times, a company's financial performance may have no correlation with the stock price performance. They are a trader's delight and may often be tipped as bright candidates by the brokers.

Cautious investors would generally tend to avoid them altogether despite their strong performance. This is because identification of outperformers may prove difficult. In addition, liquidity in the counter may dry up when you need it most to book profits.

Still, their strong performance over the years may induce a section of the investing public to place their bets on such stocks and on broker's tips.

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